Engineering Economy

INDIVIDUAL ASSIGNMENT – CHAP 05

5-3

Total present equivalent: PW = A∗ ( PA , MARR , N )=$ 12.5 M∗( PA , 20 % , 3)=2.106∗$ 12. 5 M =$ 26.325 M
Josh’s total bonus ¿ 0.1 %∗PW =0.1 %∗$ 26.325=$ 26,325

5-11
i=7/4%=1.75%, N=30(4)=120
VN = $10,000 (P/F, 1.75%, 120) + $10000(1.5%)(P/A, 1.75%, 120)
= $10,000 (0.1247) + $150 (50.0171)
= $8,750

5-16
$ 1500
Present money by A1=$1500: P0=
0.1
The money in the end of first year by A5:
F1=$10000(A/F, 10%, 4)
Present money by A5:
$ 10000 ( A /F ,10 % , 4 ) P
Po= ( ,10 % ,1)
0.1 F
 Engineering Economy

$ 1500 $ 10000 ( A /F ,10 % , 4 )

 CW(10%)= + ( P /F ,10 % ,1 ) =$ 34,591
0.1 0.1
b. Find the value for N for which (A/P,10%,N) = 0.10
From Table C-13, N = 80 years

$15,000,000

2010 2014 2019 2024

$5,000,000

Total equivalent money in 2014:

P4 =F¿4−$ 5 M =$ 15 M ∗ ( FP , 5 % , 4)−$ 5 M =$ 15 M∗( 1.216 )−$ 5 M =$ 13.24 M

The capitalized worth:

CW =C W 1+ C W 2=$ 250,000∗ ( PA ,5 % , ∞)+ X∗( AP ,5 % ,5)∗( PA ,5 % , ∞)

$ 250,000 X∗0.231
→ + =$ 13.24 M → X =$ 1,783,549.784
0.05 0.05
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Year Revenue Expense Net Income

s
1 6000 3100 2900
2 6200 3300 2900
3 6300 3500 2800
4 6400 3700 2700
5 6500 3900 2600
6 6600 6100 500
7 6700 4300 2400
8 6800 4500 2300
9 6900 4700 2200
10 7000 4900 2100
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5-22
What are the PW and FW of a 20-year geometric cash-flow progression increasing at 2% per year if the
first year amount is $1,020 and the interest rate is 10% per year? (5.4)

PW = [A – A(P/F,10%,20)(F/P,2%,20)] / (10%-2%) = [1020 – 1020(0.1486)(1.459)]/(0.08)

= (1020 – 225.220)/0.08 = $9934.75

FW = PW(F/P, 10%, 20) = 9934.75*6.728 = $66840.998

5-23

Year Investment of Opportunity Cost of Loss in Value of Capital Recovery

Beginning of Interest (i=15%) Asset During Year Amount for Year
Year
1 10,000 10,000 (0.15) = 1,500 3,000 1,500 + 3,000 = 4,500
2 10,000 – 3,000 = 7,000 (0.15) = 1,050 2,000 1,050 + 2,000 = 3,050
7,000
3 7,000 – 2,000 = 5,000 (0.15) = 750 2,000 750 + 2,000 = 2,750
5,000
4 5,000 – 2,000 = 3,000 (0.15) = 450 1,000 * 450 + 1,000 = 1,450
3,000

P0 = $4,500 (P/F,15%,1) + $3,050 (P/F,15%,2) + $2,750 (P/F,15%,3) +$1,450 (P/F, 15%, 4)

= $4,500 (0.8696) + $3,050 (0.7561) + $2,750 (0.6575) + $1,450 (0.5718) = $ 8,856.54

A = $8,856.54 (A/P,15%,4) = $8,856.49 (0.3503) = $3,102.45

Following equation (5-5) to check:

CR(i%) = I (A/P, i%, N) − S (A/F, i%, N) = $10,000 (A/P,15%,4) − $2,000 (A/F,15%,4) = $10,000 (0.3503) −
$2,000 (0.2003) = $3,102.12
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5-34

a/ Option 1: through annual worth method + linear interpolation

Option 2: Through Excel Method

b) Yes, IRR (18%) > MARR (15%). The plant project is acceptable

5-38
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Method 1: Calculator:

( )
15
P 255∗( 1+i % ) −1
We have: $ 3,000=$ 255∗ ,i % , N =$ → i=3.2 %
A i %∗( 1+ i% )
15

Method 2: Interpolation:

Nominal annual rate=r %=12∗i %=38.4 %

(
Effecttive rate=i eff %= 1+
r N
N ) 12
−1=( 1.032 ) −1=0.459=45.9 % per year
 Engineering Economy

Option 1: Present Worth (PW) method + Linear Interpolation:

Option 2: Through Excel Spreadsheet

The Two IRR are 4% and 32% and this occur due to changes of sign in the net cash flow
 Engineering Economy

=> the external rate of return i’ is 7.6% per year.

5-51.

Solution:
a) 0 = −$4,900 + $1,875(P/A, i′, 5)
=> i′ = 26.4%
b) θ = $4,900 / $1,875 = 3 years (to the integer year)
c) The IRR will signal an acceptable (profitable) project if the MARR is less than 26.4% and the value of
θ may indicate a poor project in terms of liquidity.
d) 1/ θ = 33.3%. This is the payback rate of return, and it over-estimates the actual IRR

5-53
PW(i'%) = 0 = −$100,000 + $20,000 (P/A,i'%,5) + $10,000 (P/G,i'%,5) + $10,000 (P/F,i'%,5)
PW(20%) = $12,891 > 0,  i'% > 20%
PW(25%) = −$897 < 0,  i'% < 25%
By linear interpolation, i'% = IRR = 24.7%

EOY Cumulative Cash Flow

1 -100,000 + 20,000 = -80,000
2 -80,000 + 30,000 = -50,000
3 -50,000 + 40,000 = -10,000
4 -10,000 + 50,000 = 40,000 > 0
 Engineering Economy

 = 4 years
Although this project is profitable (IRR > MARR), it is not acceptable since  = 4 years is greater than the
maximum allowable simple payback period of 3 years.

5-60 _
a. Calculate the IRR for each of the three cash-flow diagrams that follow. Use EOY zero for (i) and EOY
four for (ii) and (iii) as the reference points in time. What can you conclude about “reference year shift”
and “proportionality” issues of the IRR method?

b. Calculate the PW at MARR = 10% per year at EOY zero for (i) and (ii) and EOY four for (ii) and (iii).
How do the IRR and PW methods compare?

a)
Cash flow diagram (i)
PW = 0 = -1000 + 300(P/A, I’%, 5)
I’ = 15% => PW = $5.66
I’ = 16% => PW = $ - 17.8
We have 15% < I’ < 16% so we get (16% - 15%)/ [5.66 – (-17.8)] = (I’% - 15%)/ 5.66
=> I’% = 15.3%

Cash flow diagram (ii)

PW = 0 = -1000 + 300(P/A, I’’%, 5)
I’’ = 15% => PW = $5.66
I’’ = 16% => PW = $ - 17.8
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We have 15% < I’’ < 16% so we get (16% - 15%)/ [5.66 – (-17.8)] = (I’’% - 15%)/ 5.66
=> I’’% = 15.3%

Cash flow diagram (iii)

PW = 0 = -5000 + 1500(P/A, I’’’%, 5)
I’’’ = 15% => PW = $28.23
I’’’ = 16% => PW = $ - 88.56
We have 15% < I’’’ < 16% so we get (16% - 15%)/ [28.23 – (-88.56)] = (I’’’% - 15%)/ 528.23
=> I’’’% = 15.3%

Hence, IRR = I’% = I’’% = I’’’% = 15.3%

b) MARR = 10%
(i) PW0 (10%) = -1000 + 300(P/A,10%,5) = -1000 + (300*3.791) = $137.3
(ii) PW0 (10%) = -1000(P/F,10%,4) + 300(P/A,10%,5)(P/F,10%,4)
= -1000(0.6830) + (300*3.791*0.6830) = $93.78
(ii) PW4 (10%) = -1000 + 300(P/A, 10%, 5) = -1000 + (300*3.791) = $137.3
(iii) PW4 (10%) = -5000 + 1500(P/A, 10%, 5) = -5000 + (1500*3.791) = $686.5
So we select (iii) at EOY = 4 to maximize PW(10%)
PW (15.3%) = 0 for all three cases